China Restricts Banks’ Use of Bitcoin

HONG KONG — China moved on Thursday to restrict its banks from using Bitcoin as currency, citing concerns about money laundering and a threat to financial stability.

The action comes as monetary authorities around the world have begun to confront the issue of Bitcoin, a virtual currency whose value has soared in recent months as interest in it has spread. Part of its rise has been driven by intense demand for the virtual currency in China.

The notice curtailing financial institutions’ involvement with Bitcoin was issued by the People’s Bank of China and four other ministries and agencies, and the directive said the step was needed to “protect the status of the renminbi as the statutory currency, prevent risks of money laundering and protect financial stability.”

The notice said that Bitcoin was “not a currency in the real meaning of the word” but was rather a “virtual commodity that does not share the same legal status of a currency. Nor can, or should, it be circulated or used in the marketplace as a currency.”

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A sign in the window of a San Francisco restaurant that accepts Bitcoin. Chinese authorities have restricted the use of the currency.CreditStephen Lam/Reuters

Last month, in a sign of Bitcoin’s growing acceptance, American regulatory officials told a Senate hearing that financial networks like Bitcoin offered tangible benefits for the financial system. But they warned of the potential for money laundering and other criminal activity associated with such networks.

The remarks by United States officials, along with wider acceptance of the virtual currency by merchants, had helped propel the value of the virtual currency beyond $1,100, leaving its total worldwide value at more than $11 billion. It dropped more than $100 on Thursday, according to the Mt.Gox exchange, which handles Bitcoin trading online, to $1,100 from $1,217.

Bitcoin was established in 2009 by an anonymous programmer or collective known as Satoshi Nakamoto. Part of the value of the currency is attributable to its limited supply. A maximum of 21 million units can be created, leading investors to bid up the price as demand grows.

But with the growing acceptance of the virtual currency has come increasing concerns about its potential use in illicit transactions. In October, the American authorities arrested Ross Ulbricht, the alleged founder of the online marketplace Silk Road, after claiming that the site was being used to buy and sell drugs, weapons and pornography. Bitcoin was the primary form of payment on Silk Road, where people could make purchases anonymously.

The Chinese move came after officials in Beijing had expressed some support for the legitimacy of Bitcoin. Yi Gang, the deputy governor of the People’s Bank of China and the director of the State Administration of Foreign Exchange, said in November that although the virtual currency might not find favor with China’s central bank, people should be free to participate in the Bitcoin market.

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While regulators debate the pros and cons of bitcoins, this volatile digital currency inspires the question: What makes money, money?

That sentiment was echoed in the announcement Thursday.

“Ordinary members of the public have the freedom to participate in Bitcoin transactions as a kind of commodity trading activity on the Internet, provided they assume the risks themselves,” the statement said.

In China, Bitcoin was starting to gain favor even among merchants. In the Chaoyang district in Beijing, a restaurant started accepting Bitcoins for payment in defiance of earlier regulation stating that virtual currencies could not be used to purchase real-life goods or services.

But in its statement Thursday, the Chinese central bank raised questions about whether Bitcoin could ever gain true legitimacy as legal tender: “In essence, Bitcoin is a kind of special virtual commodity, and does not have the same legal status as a currency.”

“Currently, the public lacks sufficient understanding of Bitcoin, and some individuals have been caught up by faddishness or a speculative mentality in holding, using and trading in Bitcoins,” the statement said.

The explanation said that Bitcoins possess “quite high speculative risks,” because of the relatively small market and 24-hour trading, with no curbs on market declines. It said: “The price can be easily controlled by speculators, creating severe turbulence and huge risks. Ordinary investors who blindly follow the crowd can easily suffer major losses.”

Chris Buckley contributed reporting from Hong Kong, and Adam Century contributed from Beijing.